The changes in macroeconomic thinking prompted by the Great Depression and the Great Inflation of the 1970s were much more dramatic than have yet occurred in response to the events of the last decade. This column argues that this gap is likely to close in the next few years as a combination of low neutral rates, the re-emergence of fiscal policy as a primary stabilisation tool, difficulties in hitting inflation targets, and the financial ramifications of a low-rate environment lead to important changes in our understanding of the macroeconomy and in policy judgements about how to achieve the best performance.

Population ageing is likely to affect many areas of life, from pension system sustainability to housing markets. This column shows that monetary policy can be considered another victim. Low fertility rates and increasing life expectancy substantially lower the natural rate of interest. As a consequence, central banks are more likely to hit the lower bound constraint on the nominal interest rate and face long periods of low inflation, especially if they fail to account for the impact of demographic trends on the natural interest rate in real time.

The ECB Conference on Monetary Policy took place in Frankfurt from 29 to 30 October 2018. This column describes presentations on topics including the interaction of monetary policy and financial markets, the relevance of banks and credit flows for monetary policy transmission, and the current challenges for monetary policy frameworks and strategies. The conference provided a forum for academic research and the practice of central banking to meet.

The flattening of the US yield curve has left academics, central bankers and market commentators divided, with one camp interpreting it as a sign of impending recession (in line with historical patterns), and the other camp arguing that this time is different given unprecedented changes in monetary policy and other structural forces. This column argues that the ECB’s quantitative easing programme undermined the performance of term spreads as predictors of recessions. It suggests and tests a modified term spread and several other variables that are more successful at predicting recessions.

Many countries have now adopted negative nominal interest rates. The column uses data on 5,000 banks affected by this policy to conclude that, while their net income has not fallen, strategies to increase non-interest income are unlikely to be sustainable. Therefore we cannot assume that bank performance and lending will carry on at current levels over extended periods of negative policy rates.

The damage done by procyclical fiscal policy in the euro area between 2010 and 2014 is likely to be even larger than previous studies have suggested. The column argues that fiscal policymakers at the time created a 'doom loop', with unfounded pessimism feeding into policy, and the consequences of those policies increasing pessimism. This has created hysteresis, permanently reducing GDP.

Growth rates have been stubbornly low since the financial crisis, and many have noted that the interest rate environment has been weakening since the 1980s. This column places recent episodes in the context of longer-term economic history, going back to the 14th century. Trends over recent decades are generally in line with a long-term ‘suprasecular’ trend of declining real rates. Negative real rates could become a more frequent phenomenon, and indeed constitute a ‘new normal’.

Persistent low interest rates prompt the question of whether the natural, or equilibrium, rate of interest has similarly shifted downwards. This column uses data for seven OECD countries to explore how low interest rates have affected potential output. The results lend support to concerns that a prolonged period of low real interest can reduce the natural rate. This causality can run through both real and financial channels.

The Global Crisis and Great Recession dealt a blow to inflation targeting as a good monetary policy framework, and several prominent economists and central bankers have suggested that price-level targeting could help in bringing the economy back to normal. This column argues that although a newly established policy regime could well have low initial credibility, this may not be a problem as credibility can improve over time and lead to convergence toward the target equilibrium.

Existing research offers little guidance to policymakers who want to understand the interactions between economic fluctuations, growth, and stabilisation policies. This column introduces a Keynesian growth framework that provides a theory of long-run growth, built on a Keynesian approach to economic fluctuations. In the model, pessimistic expectations about future growth can give rise to stagnation traps. It suggests that monetary policy during a stagnation trap is hindered by credibility issues.

Economists disagree on the macroeconomic role of negative interest rates. This column describes how, due to an apparent zero lower bound on deposit rates, negative policy rates have so far had very limited impact on the deposit rates faced by households and firms, and this lower bound on the deposit rate seems to be causing a decline in pass-through to lending rates as well. Negative interest rates thus appear ineffective in stimulating aggregate demand.

What are the constraints of the zero lower bound? In this video, George Evans explains how sufficiently large fiscal stimuli can be used to avoid stagnation. This video was recorded in July 2017 at a macroeconomics conference organised by the Bank of England.

The classic rationale for flexible exchange rates was that policymakers would be unconstrained by currency targets. The Great Recession, however, saw numerous central banks constrained instead by the zero lower bound. This column considers which exchange rate regime is best for small open economies in a global recession. The model suggests that if the source of the shock is abroad and foreign interest rates become constrained at their zero lower bound, then flexible exchange rates do provide a great deal of insulation to the domestic economy.

Interest rates continue to decline across the globe, while returns to capital remain constant or increasing. The reasons for this widening risky-safe gap are wide-ranging. This column illustrates the secular rise of risk intolerance in the global economy, and summarises a new macroeconomic framework suitable for this environment. It uses this framework to discuss the current global macroeconomic context, its underlying fragility, and the coexistence of low equilibrium interest rates and high speculation.

Portfolio rebalancing through large-scale asset purchases is one of the major transmission channels under the zero lower bound. This column assesses whether the channel has been effective in Japan, focusing in turn on financial institutions, firms, and households. Japanese firms and households are notoriously risk averse, limiting the effectiveness of the portfolio rebalancing channel. These results suggest that more drastic structural reforms and growth strategies are needed.

Exiting from unconventional monetary policies is now a key issue for central banks, and especially for the US Federal Reserve. This column argues that the Fed already began this exit some time ago, and that the relevant part of its balance sheet has already shrunk by about one quarter of GDP. Pursuing the current policy of reinvesting would lead to a full exit within ten years.

Central banks are now moving towards exiting from quantitative easing and other unconventional monetary policies. This column highlights a 2013 CEPR/ICMB report that examined the policy challenges surrounding this difficult and unprecedented task. It explores ways policymakers could handle exit and its long-run implications. This is part of the CEPR Flashbacks series that highlights the relevance of past CEPR reports to today’s challenges.

Our CEPR Flashbacks highlight past CEPR reports relevant to today’s challenges. This column highlights a report first published in 2013, which examined how the exit from unconventional monetary policies could be handled by policymakers, what the post-exit world will look like, and the long-run implications for central banks.

Recent economic events cast doubt on the standard macroeconomic models. This column looks at new economic models built on the idea that inequality and income risk matter for the business cycle and long-run outcomes. While still in their infancy, these models show promise in addressing the concerns about the old New Keynesian models, and in bringing about a shift in the way that macroeconomists think about aggregate fluctuations and stabilisation policy.

When a government wants to cut a deficit, it must decide both how and when to do it. Research has treated the two questions as if they are independent, which risks attributing good policy to good timing, or vice versa. This column argues that when the effects are considered simultaneously, the composition of fiscal adjustments is much more important than the state of the cycle. Fiscal adjustments based upon spending cuts have losses that are on average close to zero, while those based upon tax increases are associated with large and prolonged recessions, regardless of whether or not the adjustment starts in a recession.